UK budget is far from concrete as govt spins around on income tax increases

EU mid-market update: UK budget is far from concrete as govt spins around on income tax increases; Gilts whipsaw; Is AI circular financing a canary in the coal mine?

Notes/observations

- UK assets once again take the European focus, but significantly more volatile than earlier in week. FT dropped a piece that UK govt is reversing plans to increase income taxes at the Autumn budget. Gilt yields rose ~15bps at open, sterling and FTSE100 dropped as market unwound many months of priced in tax increases. However, details emerged shortly after, noting the trigger was improved OBR economic forecasts, showing a £20B fiscal gap, instead of £20-30B, but that major tax rises are still expected to fill gaps.Assets reversed opening moves, paring the selloff in Gilts and giving a bid to GBP. In last few minutes, govt confirmed no rise to income tax at budget.

- Bearish narrative is running hot, given the focused selling of tech and commentary on overpriced AI valuations, debt concerns and circular financing. However, looking at the overall market, the increased volatility is keeping us rangebound, as S&P and DOW actually on track to close higher for the week.

- Oracle’s still-missing $30–40 billion AI mega-financing has quietly become the most plausible candidate for a DeepSeek-style shock, with widening CDS and an absent securitisation deal hinting that credit, not compute, may be the first choke point of the AI boom. If lenders refuse to underwrite the next tranche of Oracle-linked debt, markets could reprice AI infrastructure as violently as they did in Jan 2025, revealing an overlevered, circularly financed ecosystem whose fragility was hiding in plain sight.

- This hints that AI boom’s greatest strengths - dense GPU sharing, relentless efficiency gains, trillion dollar strategic loops and massive infra buildouts - have quietly become its weakest points, leaving markets exposed to shocks ranging from a GPU security flaw that halves utilisation to a free-inference breakthrough that collapses the scarcity premium of high-end clusters. Add in SoftBank’s circular Stargate financing, new accounting rules that force impairments, and power grids hitting physical limits, and investors face a 2026 scenario where a single disclosure, exploit or downgrade could trigger a DeepSeek-scale repricing across GPUs, clouds and AI infrastructure.

- With only tail end of earnings season left and US govt shutdown over, investors are awaiting the delayed US economic data and upcoming Fed speak to get more clarity on next rate decision due Dec 10th.

- Asia closed lower with KOSPI underperforming -3.8%. EU indices -1.3% to -0.8%. US futures -0.6% to -0.2%. Gold -0.2%, DXY +0.1%; Commodity: Brent +2.3%, WTI +2.6%; Crypto: BTC -5.8%, ETH -9.5%.

Asia

- China Oct Retail Sales Y/Y: 2.9% v 2.8%e (slowest growth since 2024).

- China Oct Industrial Production Y/Y: 4.9% v 5.5%e (slowest growth since 2024).

- China MOF mandates investment banks for a Euro-denominated bond issuance.

- Japan FTC regulators will generally allow shipbuilding firms to merge.

- Japan PM Takaichi: Hard to set numerical target for minimum wage presently.

- Japan's Top Automobile Industry Union Chief: No plans to scale back wage demands for next year.

- RBNZ confirms to ease mortgage loan-to-value ratio (LVR) restrictions, as announced Oct 14th.

- Malaysia Central Bank (BNM): Concerns over US economy, easing of tariff uncertainties to continue support ringgit.

Europe

- UK PM Starmer and Chancellor Reeves said to abandon plan to increase income tax rates - FT.

- Improved OBR economic forecasts led to Chancellor Reeves dropping income tax hikes at upcoming budget; Still expected to deliver fiscal headroom of £15-20B; Major tax rises are expected to fill gaps - citing people familiar.

- German Budget Committee approves 2026 Budget, as expected; Includes spending proposal of €524.5B, including €97.9B in borrowing plan and €58.3B in investments plan.

- EU Trade Commissioner Sefcovic: Economic security package will include export controls.

- Greece Fin Min Pierrakakis: Exploring earlier repayment of debt.

Americas

- Defense Sec Hegseth announces an international anti-drug operation - X post.

Trade

- Brazil Foreign Min Veira: US is 'analyzing' Brazil's proposal on tariffs, could send response 'soon'.

- US Sec of State Rubio said to meet with Brazil Foreign Min and discuss reciprocal framework for a US-Brazil trade deal.

- US and Switzerland said to 'close in' on trade deal; details were not disclosed.

- South Korea Pres Lee: Notes that Fact Sheet for US-Korea trade now finalized; US Pres Trump made 'rational decision' for Fact Sheet.

- South Korea Trade Ministry: South Korea and US to select investment plans by Jan 2029 for strategic investments.

- China PBOC said to enhance cooperation with the UK; the two sides exchanged views on China-UK monetary and financial cooperation during Nov 11-12th meeting; cites PBOC statement.

Conflict/tensions

- US Coast Guard said to respond to Russian military vessel off of Honolulu.

- US approves potential $330M military sale of fighter jet spare parts to Taiwan.

- Reportedly Russia's major Novorossiysk Black Sea port has halted oil exports after drone attack.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -1.12% at 574.14, FTSE -1.33% at 9,677.10, DAX -0.80% at 23,850.00, CAC-40 -0.88% at 8,159.90, IBEX-35 -1.32% at 16,363.47, FTSE MIB -1.23% at 44,204.00, SMI -0.73% at 12,667.78, S&P 500 Futures %].

Market Focal Points/Key Themes: European indices opened lower across the board and ramined under pressure through the early part of the session; loss or risk appetite attributed to concerns over longevity of AI boom; among sectors managing gains are energy and consumer discretionary; among sectors leading the way lower are technology and financials; oil & gas subsectors supported following Ukrainian strike on Russian oil export facility; no major earnings expected in the upcoming US session.

Equities

- Consumer discretionary: Richemont [CFR.CH] +7.5% (earnings; potential Swiss trade deal), Bechtle [BC8.DE] +15.5% (earnings. Oct trends).

- Financials: Swiss Re [CFR.CH] -3.0% (earnings).

- Industrials: Alstom [ALO.FR] +4.0% (earnings).

- Technology: ASML [ASML.NL] -2.5% (US tech sell-off; Applied Materials results), SAP [SAP.DE] -3.0% (investor conf comments).

Speakers

- Romania Central Bank (NBR) Gov Isarescu: August VAT hike was 85% passed through on an aggregate level.

- Greece Fin Min Pierrakakis: See 2026 GDP growth at 2.4%; Exploring earlier repayment of debt.

- Sweden Central Bank (Riksbank) Dep Gov Seim: Oct food prices are higher than expected; Higher inflation is due to 'temporary factors'

- ECB's Kazaks (Latvia): Current rate level is in line with inflation.

- Japan Economic Revitalization Min Kiuchi: Economic measures should be about what's needed and not its scale; A weak Yen has effect of pushing up prices, we're continuing to monitor the effects.

- Japan PM Takaichi: Hard to set numerical target for minimum wage presently.

- China former Fin Min Lou: need to increase fiscal deficit to support reforms.

Economic data

- (NL) Netherlands Sept Exports Y/Y: 2.6% v 0.6% prior; Imports Y/Y: 1.7% v 3.5% prior.

- (FI) Finland Oct CPI M/M: -0.2% v 0.3% prior; Y/Y: -0.2% v 0.5% prior.

- (IN) India Oct Wholesale Prices (WPI) Y/Y: -1.2% v -0.8%e; Wholesale Food Prices Y/Y: -5.0% v -5.2% prior; Fuel, Power and Lightning Prices Y/Y: -2.6% v -2.6% prior.

- (TR) Turkey Central Bank (TCMB) Nov Inflation Expectation Survey: Expected inflation next 12 months: 23.5% v 23.3% prior.

- (RO) Romania Q3 Advance GDP Q/Q: 1.6% v 1.2% prior; Y/Y: -0.2% v -0.3%e.

- (SE) Sweden Oct Unemployment Rate: 8.9% v 8.3% prior; Unemployment Rate (seasonally adj): 9.3% v 8.8% prior; Trend Unemployment Rate: 9.0% v 8.9% prior.

- (TH) Thailand Foreign Reserves w/e Nov 7th: $271.6B v $272.0B prior.

- (FR) France OCT final CPI M/M: 0.1% V 0.1%E; Y/Y: 0.9% V 1.0%E; CPI EU Harmonized M/M: 0.1%e v 0.1%e; Y/Y: 0.8% v 0.9%e; CPI (ex-tobacco) Index: 119.89 v 119.81 prior.

- (ES) Spain Oct Final CPI M/M: 0.7% v 0.7%e; Y/Y: 3.1% v 3.1%e; CPI EU Harmonized M/M: 0.5% v 0.5% prelim; Y/Y: 3.2% v 3.2% prelim; CPI Core M/M: +0.5% v -0.3% prior; Y/Y (final): 2.5% v 2.5% prelim.

- (RU) Russia Narrow Money Supply w/e Nov 7th (RUB): 19.04T v 18.99T prior.

- (HK) Hong Kong Q3 Final GDP Q/Q: 0.7% v 0.7% prelim; Y/Y: 3.8% v 3.8% prelim.

- (PL) Poland Oct Final CPI M/M: 0.1% v 0.1% prelim; Y/Y: 2.8% v 2.8% prelim.

- (IT) Italy Sept Trade Balance: €2.9B v €1.9B prior; EU Trade Balance: -€0.1B v €0.0B prior.

- (IT) Italy Sept General Government Debt: €3.081T v €3.081T prior.

- (EU) Eurozone Q3 preliminary GDP Q/Q: 0.2% V 0.2% advance; Y/Y: 1.4% V 1.3% advance; Employment Q/Q: 0.1% v 0.1% prior; Y/Y: 0.5% v 0.6% prior.

- (EU) Euro Zone Sept Trade Balance (seasonally adj): €18.7B v €10.6B prior; Trade Balance NSA (unadj): €19.4B v €1.0B prior.

- (CY) Cyprus Q3 Preliminary GDP Q/Q: 0.9% v 0.5% prior; Y/Y: 3.8% v 3.6% prior.

Fixed income issuance

- India sells total INR280B vs. INR280B indicated in 2040 and 2065 bonds.

- Sweden sells SEK330M vs. SEK500M indicated in 0.75% Jun 2036 I/L bonds; Avg Yield: 1.032% v 0.982% prior; Bid-to-cover: 1.86x v 2.47x prior.

Looking ahead

- 05:30 (PL) Poland to sell bonds.

- 06:00 (UK) DMO to sell £6.0B in 1-month, 3-month and 6-month bills.

- 06:00 (BR) Brazil Nov FGV Inflation IGP-10 M/M: No est v 0.1% prior; Y/Y: No est v 1.6% prior.

- 06:30 (IS) Iceland to sell Bonds.

- 06:30 (IN) India Forex Reserves.

- 07:00 (IL) Israel Oct CPI M/M: No est v -0.6% prior; Y/Y: No est v 2.5% prior.

- 08:00 (ES) Spain Debt Agency (Tesoro) announcement on upcoming issuance.

- 08:00 (IN) India announces upcoming bill issuance (held on Wed).

- 08:00 (RU) Russia Q3 Preliminary Current Account: No est v $4.0B prior.

- 08:00 (RU) Russia Sept Trade Balance: No est v $7.5B prior; Exports: No est v $31.5B prior; Imports: No est v $24.1B prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (US) Oct Retail Sales and PPI likely delayed due to govt shutdown.

- 08:30 (CA) Canada Sept Manufacturing Sales M/M: No est v -1.0% prior; Wholesale Sales ex Petroleum M/M: No est v -1.2% prior.

- 08:30 (US) Weekly USDA Net Export Sales.

- 10:00 (CO) Colombia Sept Retail Sales Y/Y: No est v 12.4% prior; Manufacturing Production Y/Y: No est v 1.0% prior; Industrial Production Y/Y: No est v 0.4% prior.

- 10:00 (US) Sept Business Inventories likely delayed due to govt shutdown.

- 10:30 (US) EIA Natural Gas Storage.

- 11:00 (RU) Russia Q3 GDP Advance Y/Y: No est v 1.1% prior.

- 11:00 (RU) Russia Oct CPI M/M: No est v 0.3% prior; Y/Y: No est v 7.98% prior.

- 11:00 (RU) Russia Oct Core M/M: No est v 0.4% prior; Y/Y: No est v 7.7% prior.

- 13:00 (US) Weekly Baker Hughes Rig Count data.